I'm thinking of buying a practice, after I eventually get through residency. Sure hope I get in somewhere for residency...
Anyways, I have an opportunity all lined up with relative that is going to retire when I'm done and I am going to buy his practice.
A few questions for those much more knowledgable than I.
1. He makes about $600,000 a year. How much do you think it would cost to buy his practice? We haven't discussed cost yet. I think he will give me an okay deal. I don't know the number of patients he has, but it seems he consistently sees around 120 people per week in clinic and has 2 surgery days. Pretty busy (At least I think that's busy).
2. How many patients would I expect to lose when I buy the practice? 20%? It just seems you would lose a lot of patients that just wouldn't trust a young doctor.
What is the practice gross revenue? The patient volume you are describing is solid, if they are the office encounters seen over the three non-surgical days (and still fine if they are including the surgeries).
I have to assume the $600,000 is net of all overhead expenses of the practice.
You didn't say what the asset base of the practice was: does the practice own its offices or a surgery center? (Or part of a surgery center?)
Calculating the market value of the assets should be straightforward. An equipment inventory is needed for that. Don't forget to include the computer system and software, phone system and other non-ophthalmic items.)
Are there liens or debts on the practice? Will you be assuming those?
If you will be purchasing the accounts receivable, get an idea what the value of that would be. ( A rough estimate might be 50 percent of a month's average revenue, if he is filing claims electronically.)
The goodwill value is the hard part. Is there a lot of competition in the area? Are the hospital or other groups actively recruiting others? Is it possible for both you and the selling doctor to work there at the same time so that he can remain for a time to introduce you to his patients?
I will assume you will be able to be qualified on all of the carriers plans. Are the referring doctors going to be willing to refer to you? Introductions to them are just as important as introductions to patients. Also, I will assume you will be able to get staff privileges at a local hospital sufficient to satisfy your surgical center's transfer requirements.
How many patients will stay with you versus leave for someone else over the first year is going to depend on how many other doctors are available and accepting patients nearby. Your losses to other practices could be negligible or very substantial. The old rule of thumb was one-third leaving, but that is old information. Much depends on the circumstances and how well the seller prepares the practice for your arrival and taking over. You might have very few lost patients with enough months of announcements, a photo of you in the waiting room, letters to the patients assuring them of continuity and your qualifications (first a letter from him to patients then perhaps a letter from you sometime later), possibly a trip around to meet key referring optometrists and medical doctors before you arrive to the practice, all laying the ground for your arrival, then local newspaper advertisements in the month before you start work.
So what is the value of that goodwill? Good question. Worst-case scenario, not much. Best case scenario, it is worth the advertising you would have to buy to attract a similar volume of patients to the office on opening without the value of the departing doctor's introductions. (The location value of goodwill is debatable--one could say if you moved next door, you would owe nothing in supposed goodwill by location and in fact, someone wanting to compete with you could do just that.) Remember, the goodwill value is
not the value of the work you will have to do for the patients who choose to stay. And it also isn't the cost of your advertising yourself or doing things yourself to establish your presence and build your own goodwill. You are going to do that work, not the departing doctor. So I don't think goodwill is going to be par or more of the services. Also, "goodwill" as such has its greatest value at the outset and is worth less as you remain and the seller departs. At six months, your own reputation should overtake the value of the goodwill--particularly in a referral-dependent practice, and by a year, your reputation will have to carry the practice, not that of the departing doctor. No one would place the advertising cost at 100% of revenue and expect to stay in business. Also, patient turnover is important. Do patients get referred by local optometrists just for surgery but return to them afterward, meaning that the practice has a high flow of new patients but a relatively low percentage staying beyond 90 days? Or are there a lot of steady patients with glaucoma, dry AMD, contact lenses and general eyecare issues who return regularly for years?
You need to see some trends in the practice. Is income declining or steady?
If declining, that will push goodwill valuation down as the steady to increasing operations costs everyone sees will squeeze your profits going forward.
Suppose you got no introduction at all. The practice was just sold to you at asset value plus or minus AR and liabilities. You might keep half the patients by doing nothing. The goodwill owed to someone else for that half remaining would be zero. You would have your own introduction campaign, meet the referring doctors, advertise in the local papers and so forth, Patients would call, be surprised that Dr. Niceguy had left, and you would have to do a sales job on the phone to get them to make an appointment with you. Are the local patients going to book with you or will they hang up and go to the local consumer guide or call their friends to see who they see? The goodwill value really pertains to those patients who would otherwise go elsewhere but because of the reputation and persuasiveness of the selling doctor, will choose to remain with you. Also, it is short-term; it is only relevant to the patients who come because they or their referring doctor respect the selling doctor's reputation. Everything you do after that is
your goodwill.
I happen to think assigning a blanket value to a practice or to goodwill, say one year net revenue, is a bad way to estimate anymore. If anything, with annual threats to revenue by way of Medicare cuts and freezes--which affect nearly all ophthalmology practices except peds and refractive practices--make profitability uncertain, and ultimately, improved profitability is the only reason to place a value on goodwill at all.
One possible way to value goodwill is to make it contingent on practice performance: agree to pay a percentage of net revenue from the practice that declines with time but that goes to zero if the practice does not meet expected revenue targets within the payout period. That protects you from overpaying and it heavily incentivizes the seller to prepare the practice well for your arrival and successful transition. Win-win, as it were.